A free-market economy with perfect allocative efficiency does not exist in reality because
A)government intervention in the economy prevents the economic forces that would eventually bring the market to an allocatively efficient outcome.
B)the assumption of profit-maximization is not a realistic assumption about the behaviour of firms.
C)the assumption of utility maximization is not a realistic assumption about the behaviour of consumers.
D)firms in many industries have some degree of market power and face negatively sloped demand curves,and produce a level of output where P MC.
E)the decentralization of economic power in a free-market economy does not allow for allocative efficiency.

Question

A free-market economy with perfect allocative efficiency does not exist in reality because
A)government intervention in the economy prevents the economic forces that would eventually bring the market to an allocatively efficient outcome.
B)the assumption of profit-maximization is not a realistic assumption about the behaviour of firms.
C)the assumption of utility maximization is not a realistic assumption about the behaviour of consumers.
D)firms in many industries have some degree of market power and face negatively sloped demand curves,and produce a level of output where P > MC.
E)the decentralization of economic power in a free-market economy does not allow for allocative efficiency.

Quizplus · Accepted Answer

Firms in many industries have some degree of market power and face negatively sloped demand curves, which means they do not produce at a level of output where P = MC, leading to a suboptimal allocation of resources. Additionally, there may be externalities or public goods that the market fails to address without government intervention. The other options are also valid reasons why a perfectly allocatively efficient free-market economy does not exist, but D is the most directly related to the concept of allocative efficiency.

A Free-Market Economy with Perfect Allocative Efficiency Does Not Exist